U.S. budget talk deadlock weighs on world stocks

LONDON Fri Nov 30, 2012 4:59pm IST

A trader looks at computer screens during a Spanish bond auction in Madrid November 8, 2012. ThursdayREUTERS/Andrea Comas/Files

A trader looks at computer screens during a Spanish bond auction in Madrid November 8, 2012. Thursday

Credit: Reuters/Andrea Comas/Files

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LONDON (Reuters) - Concerns about a stalemate in crucial U.S. budget talks capped gains in world equity markets on Friday, while the euro neared a one-month high on better demand for European peripheral debt.

Markets are on edge over the lack of progress in talks to close the budget gap in Washington, where a deal is needed by year-end or automatic spending cuts and tax rises will be triggered that would tip the U.S. economy into a recession.

The MSCI world equity index traded near its highest level for a month on Friday at 332.6 points, virtually unchanged despite earlier gains in Asian markets.

The so called 'fiscal cliff' is the last big stumbling block to a what many forecast could be major rally in riskier assets like equities next year as the easier monetary policies of world's major central banks take hold.

"For the next 12 months I think the markets are going up," said Marino Valensise, chief investment officer at Baring Asset Management Ltd.

"All the liquidity creation, quantitative easing, lending to the banks of Europe, all this is conducive of a much better market environment for riskier assets. So we could potentially see quite a substantial rally," he said.

But before being comfortable in moving back into the market, most investors want to see a deal in Washington where the latest announcements have been less than hopeful.

On Thursday the leading Republican politician, House of Representatives Speaker John Boehner, said there had been no substantive progress in talks with the White House yet, dampening hopes for a early deal less than 24 hours after he said he was "optimistic" about reaching a pact.

The comments stalled gains in the FTSEurofirst 300 index of top European shares which had jumped 1.1 percent on Thursday to its highest close since July 2011. The index was flat at 1122.40 points in early trade on Friday.

London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX were between 0.1 to 0.25 percent firmer while U.S. stock futures pointed to a steady open when Wall Street resumes trade.

Earlier MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6 percent to its highest level since March 1, and a monthly gain of 2.1 percent.

European shares are on course for their best month since August and a sixth straight monthly gain as investors anticipate a deal will eventually emerge in the U.S. budget and are encouraged by this week's agreement to provide aid to Greece.

"I think there will be some kind of agreement over the next week, or week and a half, maybe a little bit longer. Markets will anticipate that, so the underlying tone of the market will clearly be strong," said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.

EUROPEAN FEARS EASE

The signs that Europe's debt crisis has begun to stabilise with the Greek deal sorted has also helped euro which was up 0.3 percent to just over $1.30 on Friday and at a seven-month high against the yen of 107.55 yen.

Strong demand at an Italian bond auction this week which cut Rome's borrowing costs to a two year low, and falls in Spanish bond yields have encouraged investors back into European assets.

Spanish and Italian 10-year bond yields were stable in early trade on Friday at 5.36 percent and 4.54 percent respectively, and well below their peak in July when's Spain's debt yielded more than six percent.

Amid the unclear prospects for the U.S. budget talks and the better outlook for Europe's debt crisis, investors were also eyeing data out of Asia that could offer signals for the likely direction of global economic growth.

India's economy grew at a lower-than-expected annual 5.3 percent in the quarter ending in September, against analysts' forecasts of 5.4 percent. Asia's third largest economy is still growing faster than many other major economies, but it has slowed from 6.5 percent in the 2011/12 fiscal year.

ASIAN OUTLOOK

Japan, the world's third-largest economy, by contrast reported that its industrial output unexpectedly rose 1.8 percent in October, the first increase in four months, suggesting the negative impact of the global slowdown and a diplomatic row with China may have run its course.

Japanese manufacturing activity contracted in November at the fastest pace in 19 months however, according to a survey indicating it was hurt by falling exports, weak domestic demand and declining capital expenditure.

In South Korea, another big export-reliant economy, industrial output grew for a second month in a row in October, backing expectations for a recovery in the current quarter.

On Saturday, China will release the official manufacturing PMI for November, which is likely to show factory activity expanding at its fastest pace in seven months.

The data had little impact on world oil markets where the fiscal crisis in the U.S. is in centre stage due to its potential impact on demand from the world's biggest consumer.

Brent crude dropped 30 cents to $110.46, while U.S. crude was down 20 cents at $87.87 a barrel.

"We are trading day to day based on the running drama over the fiscal cliff, and the market doesn't look very optimistic at the moment," said Carl Larry, a derivatives broker with Atlas Commodities in Houston.

Gold edged up 0.3 percent to $1,729.55 an ounce but prices were on track for their biggest weekly drop this month on all the uncertainty over the U.S. budget talks.

(Additional reporting by Tricia Wright and William James; editing by Philippa Fletcher)

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